Price-to-Sales (P/S)
Price-to-sales (P/S) is market capitalization divided by annual revenue. It values a company on what it sells rather than what it earns, which makes it the multiple of last resort for businesses without meaningful profits, and a sanity check for everything else.
The math
A 5 billion dollar company generating 2.5 billion in revenue trades at 2 times sales. The number only means something through margins.
| Net margin | P/S | Implied P/E |
|---|---|---|
| 10% | 2.0x | 20x |
| 2% | 2.0x | 100x |
Every P/S ratio is a P/E in disguise, with an assumption about profitability hiding inside.
The trap
Comparing P/S across business models. A software company keeping 25 cents of each revenue dollar and a grocery chain keeping 2 cents cannot share a benchmark: the software dollar of sales is worth over ten times more.
The historical warning stands too: entire cohorts of investors have paid double-digit P/S multiples for growth stories whose margins never arrived, and the arithmetic of that bet requires near-perfect execution for a decade.
The move
Use P/S for unprofitable growth companies and cyclicals at earnings troughs, but always with the margin question attached: what net margin does this business reach at maturity, and what P/E does today’s price imply if it gets there? If the answer needs heroic assumptions, the low-looking multiple is not low.